The present invention relates to activity based costing of a business process.
Activity based costing (ABC) is a cost accounting methodology which seeks to distribute costs to individual business units (product, customer, service, business line, etc.) based on the activities needed to produce the service, product or desired output. ABC begins by identifying the activities that are required to produce products, services, and service customers. Costs are then determined for each activity. Total costs for a product, service, or customer are calculated by summing the costs of all activities necessary to produce that product or service, or to service the customer.
ABC is different from traditional cost accounting methods in three significant respects. Firstly, ABC focuses on providing costs for individual products, services or customers, where traditional cost accounting provides cost information about organizational business units such as divisions, plants or departments. Second, ABC allocates costs based on the work activities and resources consumed to produce products, services or to service customers. This is in contrast to cost accounting which allocates costs based on an arbitrary metric (an example would be allocating costs for four different business lines based on the percentage of revenue brought in by each business). Finally, ABC allows the measurement of the cost of not doing the work in such cases as machine downtime, waiting for required materials or tools, where traditional cost accounting only allows us to measure realized department or machine costs.
ABC information has both a strategic use and an operational use. At the strategic level, ABC information allows organizations to understand the true cost of producing products, services, and servicing customers. Knowing this allows organizations to shed products, services, and customers whose consumed resources are greater than the revenue they generate, or re-price these products, customers or services to generate a profit. An ABC system also allows businesses to determine the cost of “Not Doing” or hidden liability that stems from incomplete work. At the operational level, ABC information allows managers to focus in on processes and activities that consume large amounts of resources and re-engineer those processes to reduce costs and cycle time. Using ABC information, organizations can drastically change their cost structure to become more competitive.
Though ABC is widely used in manufacturing, it has been almost impossible to practice in service industries. Manufacturing accounting systems typically allow plant or division costs to be broken down to department costs, and then to machine costs, work group labor costs, machine materials cost, etc. Accountants can assign these small units of cost to specific activities, and then assign activities to products or customers. This process allow the creation of an ABC system. In service industries, accounting systems also track division or department costs. However, a large percentage of service business' department costs are labor costs. No system has been found for breaking down these costs and assigning them to activities in order to create an ABC model when workers switch between tasks and customers minute by minute. Typically service companies would use an arbitrary metric such as percentage of revenue to allocate costs, as discussed above. Another way would be to determine the amount of time out of total time spent on each business line or customer. There are two ways to accomplish this: asking an expert to render an opinion, and time sampling. Time sampling results are both inaccurate and un-duplicatable because time sampling is dependent on the process, skill of the operator, and the statistics of sampling. A time sampling subject also performs differently in a test environment than under normal conditions. An educated guess is less accurate because experts do not often recall accurately all of the activities or time required to perform a task. A solution to this problem has been required for many years. In Peter Drucker's article “The Information Executives Truly Need” (Harvard Business Review, January–February 1995, pages p. 54–62) it is stated on page 56 that “for most knowledge-based and service work, we should, within 10 to 15 years, have developed reliable tools to measure and manage costs and to relate those costs to results”. It is accordingly clear that a solution to this problem has been required for some considerable time.
Several operator independent methods of task time measurement are presently in existence. An operator independent method of task time measurement is a method which analyzes any manual operation or method into the basic motions required to perform it, and assigns each motion a pre-determined time standard which is determined by the nature of the motion and the conditions under which it is made. These measurements are calculated in such a way that they are independent of any particular operator, and instead represent the time taken to carry out an activity or task as performed by a standardized person.
Predetermined-Motion Time Systems (PMTS) is such a methodology, and is based on the Methods Time Measurement (MTM) concept developed in 1948 by H. B. Maynard, G. J. Stegemerten and J. L. Schwab. MTM is defined as a “procedure which analyzes any manual operation or method into the basic motions required to perform it, and assigns to each motion a pre-determined time standard which is determined by the nature of the motion and the conditions under which it is made. The data is often the result of frame by frame analysis of motion-picture films involving diverse areas of work, as in the case of the MTM-1 methodology. MTM and PMTS are well known technologies available in the public domain. Details of the techniques used therein can be found in “R. M. Motion and Time Study: Design and Measurement of Work”; Barnes, 7th edition; 1980.
The data is generally used to establish fair labor standards by employers and unions, in terms of the number of times the motion can be reasonably expected to be achieved in a given unit of time, and also to measure productivity of employees. The information is also used to determine the number of production workers needed for a process, manufacturing production schedules and the amount and delivery times of materials.
A problem with both MTM and PMTS is that there are many body movement/distance combinations. For example, fundamental motions evaluated by PMTS systems include reaching, leg motions, moving, side stepping, turning, turning the body, applying pressure, bending, stooping or kneeling on one knee, grasping, kneeling on both knees, positioning, sitting, disengaging, standing from sitting, releasing, eye travel, walking, eye use, foot motions, and cranking. MTM and PMTS are accordingly unwieldy measurement systems.
PMTS was refined by K. B. Zandin and the H. B. Maynard and Company, Inc. in 1974 to produce a new proprietary product, the Maynard Operation Sequence Technique (MOST®). The development of MOST was the result of an extensive review of MTM data. The MOST system is based on the concept that work is the movement of objects, work being defined as force applied over distance. The human body moves in very specific patterns, each of which have an amount of work associated therewith. For example, the hands and fingers only work in certain ways, and the legs and arms only bend in certain ways. Through millions of lab observations, MOST has defined these patterns of human body movement as work is performed and assigned time values to each pattern and distance combination. MOST® has two unique characteristics which provide advantages over previous time management systems: 1) MOST is a scientific method that can be duplicated with an expectation that the generated time values will be the same for the same work process, as the results are independent of the operator. 2) The time values assigned to discrete tasks are accurate representations of the time in which it could be expected that the task be performed, within a 95% confidence that the value is within a 5% range either side of the “true” time required to perform a task at 100% effort and 100% skill and performing the task in the manner instructed. This is because the time generated is based on millions of lab observations. Clearly the time taken by an operator could be greater than this due to inefficiency in execution of the task or lower than this due to the operator not needing to perform certain parts of the tasks (particularly mental steps) or having particular dexterity due to years of practice. The measure does not try to establish a mean value, but essentially that of an ideal person performing the task exactly as instructed.
Details of the operation of the MOST technique can be found in Work Measurement, Kjell B. Zandin, 2nd edition 1993. There are two commonly used MOST methods as described in the above publication, referred to as basic MOST® and mini-MOST®. Mini-MOST is used for high frequency, low duration activities where accuracy is very important.